Gov. Glenn Youngkin has less than three weeks to act on the pending two-year state budget, but Virginia economists and lawmakers are worried about the effect of federal job and spending cuts on Virginia revenues in the final quarter of the state’s fiscal year, which began on April 1.
Last week, Secretary of Defense Pete Hegseth ordered the cancellation of $5.1 billion in contracts for information technology consulting services. The immediate effects in Virginia are not clear, but federal contracting jobs are a major source of state revenues to pay for core public services in the state’s general fund budget.
“Probably most of that work is occurring in Northern Virginia,” said Bob McNab, chairman of the economics department at Old Dominion University in Norfolk.
Hegseth’s April 10 memorandum specified four contracts, including one for the Defense Health Agency that includes services from three companies with a big presence in Northern Virginia — Accenture, Deloitte and Booz Allen. He also singled out an IT contract between the U.S. Air Force and Accenture, a professional services company with headquarters in Ireland and offices in Arlington County.
Virginia receives more federal contracts than any other state, more than $106 billion in 2023, and those jobs often carry high wages that make a major contribution to the income tax revenue withheld from paychecks. So-called “withholding taxes” account for almost two-thirds of state general fund revenue.
“We should start seeing this in the withholding tax revenue in the next month or so,” said Terry Clower, an economist who leads the Center for Regional Analysis at George Mason University.
Youngkin has not reported on revenues the state collected in March, but withholding tax collections remained strong in February, when they grew by 14.2%, compared with the same month a year ago, and 7.1% for the first eight months of the year.
Similarly, the cuts in federal jobs and contract spending under President Donald Trump have not yet shown up significantly in Virginia unemployment claims.
Virginia Secretary of Labor Bryan Slater said last week that the state had unconfirmed jobless claims for 894 federal workers and 570 employees of private contractors through April 5, with total initial claims up by 1,139 over the previous week and 1,426 over the same week the previous year.
Slater attributed most of the jump to layoffs by a single manufacturer in southern Virginia. Goodyear announced 815 layoffs at its truck and aviation tire manufacturing facility in Danville.
But the latest state unemployment report does not reflect other layoff notices by federal contractors in Northern Virginia, including MITRE Corp. in Fairfax County. MITRE has announced that will lay off 442 employees, effective on June 3.
Those jobs mean something to state revenue collections, Clower said. “MITRE’s not going to be low-wage jobs.”
Regional jump
The Bureau of Labor Statistics reported a 7.1% jump in unemployment in February from the previous month in a region that includes Northern Virginia as far south as Fredericksburg, and west as Culpeper County, two counties in the northern Shenandoah Valley and one in neighboring West Virginia.
“I do think there’s some softening in the job market,” Slater said.
So do consumers, according to a survey that the Federal Reserve Bank of New York released on Monday. The survey showed that consumers expect job growth to fall and prices to rise in the next year.
Senate Majority Leader Scott Surovell, D-Fairfax (right) is shown speaking with Gov. Glenn Youngkin Jan. 8, the first day of the legislative session. Surovell says he expects an economic slowdown as consumers pull back on spending and businesses slow hiring and investment.
MIKE KROPF, TIMES-DISPATCH
“I don’t think there’s any question there is an economic slowdown coming as consumers pull back on their spending and businesses pump the brakes on hiring and investment,” Senate Majority Leader Scott Surovell, D-Fairfax, said on Tuesday.
Virginia sales tax collections were up by 2.5% over the first eight months of the fiscal year, compared with the same period a year earlier, but consumers are pulling back on spending in Northern Virginia and the rest of the Washington, D.C., region, according to Tom Barkin, president and CEO of the Federal Reserve Bank of Richmond.
“Retail spending is way down in D.C.,” Barkin told the Economic Club of Washington last week. “You can imagine why that would be.”
In a report early last month, the Richmond Fed noted the vulnerability of localities in the Washington region, including outlying counties such as King George and Stafford, where more than 20% of the adult work force works for the federal government.
“In addition, many of the federal government jobs are relatively well-educated, well-paying jobs, the loss of which could challenge state and local finances,” the report states.
The General Assembly is keeping a close eye on the effects on state revenues from President Donald Trump’s cuts in the federal work force and spending. Trump is trying to slash the size of the federal government and save money to pay for tax cuts. Both chambers have convened special committees to monitor the cuts in federal jobs and spending.
A representative of the Weldon Cooper Center for Public Service at the University of Virginia told the House committee in late February that a 10% reduction in federal employment would cost the state almost $250 million in revenue.
Stakes for Fairfax
Jeff McKay, chairman of the Fairfax County Board of Supervisors, offered a similarly sobering outlook for Virginia’s most populous locality, based on a study by the county economic development authority.
“A reduction of 20 percent would result in the loss of 56,993 jobs in Fairfax County alone, including both federal employees and private-sector contractors,” McKay said in a public message on Tuesday. “To put it bluntly, this level of loss could surpass even what we experienced during the COVID-19 pandemic.”
“What’s especially concerning is that, unlike the COVID-19 pandemic, we are not expecting any federal assistance – these cuts are being driven by federal action,” he said. “During the pandemic, federal support allowed us to rebound quickly. This time, we’re on our own.”
In the memo about terminating the $5.1 billion in defense contracts, Hegseth said: “These contracts represent non-essential spending on third-party consultants to perform services more efficiently performed by the highly skilled members of our DoD workforce using existing resources.”
New defense contracts
The Defense Department also announced this week that it is awarding new contracts that will help companies based in Fairfax. That includes one to Northrop Grumman Corp., based in McLean, for more than $52 million and one for Acuity International LLC, based in Reston, for almost $50 million.
But the department also plans to reduce its civilian work force by 60,000 jobs, while restructuring its operations.
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McNab, at ODU, said federal civilian employees generated most $44 billion in economic activity in Virginia last year, or 5.8% of the gross domestic product.
“Any reduction in the federal civilian employment will reduce Virginia’s potential economic growth in 2025,” he said.
Youngkin has not signaled whether he will sign the revised state budget or veto line items. The Democratic-controlled legislature earlier this month rejected all but 33 of his proposed 205 amendments to the spending plan. His office did not return a request for comment on Tuesday.
Democrats worry that the governor and assembly might have to revise their expectations for revenues in the second year of the budget, which begins on July 1, because of uncertainty over the effects of federal cutbacks on the state economy.
“I think that’s a big risk,” said Sen. Jeremy McPike, D-Prince William, a member of the Senate Finance & Appropriations Committee who represents parts of Prince William and Stafford counties.
House Appropriations Chairman Luke Torian, D-Prince William, said legislative leaders from both parties are looking ahead to manage the risks.
“We plan for how to govern the commonwealth when things are very good,” Torian said, “and we plan for when things don’t look so good as well.”
Michael Martz